When you receive a notice from the IRS that you or your small business have been selected for a tax audit, you can already feel the stress start to seep in. Even if you are certain your taxes were all completed and filed correctly, you know you are in for a long and tedious journey.
You may want to consider hiring, or at least consulting, a tax professional to guide you as you cooperate with the Internal Revenue Service. A tax attorney is a great option to defend your interests and negotiate on your behalf, in ways that a Certified Public Accountant (CPA) may not be able to help you.
Who Gets Audited by the IRS?
While tax audits can be random, there are certain red flags that make tax audits more likely.
The IRS uses a program called the Discriminant Information Function (DIF) to scan all tax returns. The DIF algorithm is looking for tax returns that seem anomalous when compared to the filer’s peers. This includes things like multiple returns claiming the same dependents, abnormally high tax deductions, or major changes in income or assets.
Some of the biggest red flags for the IRS include large cash transactions, which can be normal for businesses like restaurants, hair salons, taxi services, and more. High income earners and people with foreign bank accounts are also slightly more likely to be targeted by IRS audits. Those who are self-employed, those who have high cryptocurrency transactions, and those who submit information that doesn’t match a third party reported income are also at risk for tax audits.
Being audited does not necessarily mean you did anything wrong, or that you need a tax attorney to represent you. Discrepancies may be the result of a simple misunderstanding or a typo.
Types of Audits
There are a few different types of audits, and not every type of audit requires a tax audit lawyer to get through it.
- A CP2000 notice is not an audit, but rather a notice from the IRS that your payment in income does not match what they have on file for you. They tell you what is wrong, and how to fix it. If you disagree with them, you simply need to send in supporting documents.
- Correspondence audits are generally used for simple matters, or for small amounts of money. They are conducted via mail. For this type of IRS tax audit, they may request receipts or documentation to verify or justify a deduction.
- An office audit or field audit is more serious. For office audits, you need to meet with IRS agents at one of your local IRS agency locations. You bring in your supporting documents and answer the agent’s questions. For field audits, you can expect a comprehensive look into your finances. These take place either at your residence, your place of business, or a local IRS office.
For an office or field audit, it is a very good idea to consult a tax law specialist like an IRS audit attorney. If you cannot provide receipts or records as needed, or you are concerned that you cannot handle the tax liability that results from your IRS audit, an experienced tax attorney can help.
How to Prepare For an IRS Audit
While no one looks forward to the IRS audit process, the best way to make things go smoothly is to be prepared. While you may only be audited for one tax year, if the IRS sees something suspicious they are within their rights to expand the audit to other tax years, or even start a criminal investigation if they suspect tax fraud. If you are concerned about your tax audit, hiring an IRS audit attorney can help you avoid saying something that may raise the IRS’ interest.
Here are some steps to prepare for an IRS tax audit:
- Determine the audit type. This will help you understand how in-depth you need to be when providing financial records.
- Consider hiring a tax attorney for your IRS audit defense. For a simple correspondence audit, you may not find this to be necessary. However, your income or your business are your livelihood, and it can be worth the expense to defend your cash flow.
- Gather all the necessary financial documents and records. This may include bank statements, income records, investment records, retirement contributions, charitable contributions, purchase or sale documents for property, etc. For businesses, add in financial books, travel itineraries, vehicle expenses, home office expenses, canceled checks, and more.
- Review your tax return. While you may have someone else do you tax return, you are still responsible for the information in it.
- Prepare to be polite and honest with the IRS. If you show them that you are willing to cooperate, it will help your case.
When you receive notice about a tax audit from the IRS, you may be tempted to go straight to the accountant who did your tax document preparations. You may not even realize how much IRS audit attorneys can help in this situation. However, an experienced IRS audit lawyer can be invaluable for protecting your income and your business.
If You Are Facing a Tax Audit, Hire a Tax Attorney
Although tax attorneys and CPAs are both considered licensed tax professionals and can perform some of the same tasks, there are some major differences, too. Those differences can be very relevant to you when you are facing a tax audit.
For one thing, you have attorney-client privilege with your IRS audit attorney, while your conversations with your CPA are not protected by law. Another difference is that a CPA might have good knowledge of the tax code, but understanding and interpreting the federal tax law is more in the realm of an experienced tax attorney.
Tax attorneys are also skilled negotiators who are used to dealing directly with the IRS. That makes them valuable assets to have on your side when it comes to reducing your tax liability, interest, and/or tax penalties during the tax audit. An experienced tax audit attorney can often help guide your IRS agent to stay within the same tax year, and avoid getting into a rabbit hole of other tax returns or records. They can advise you on how to speak with the IRS agent in a way that will keep you from saying something that may be misinterpreted.
Finally, an experienced tax attorney can represent you in tax court if you can’t resolve your tax liability dispute, or in criminal disputes if the IRS uncovers suspicion of tax fraud or tax evasion. This is something a CPA cannot do for you.
While you can consult a tax audit defense lawyer at any time during the auditing process, your best bet is to talk to a professional as soon as you receive your tax audit letter from the Internal Revenue Service.
CBH Attorneys Will Defend You and Your Business During a Tax Audit
When preparing your IRS audit defense, call CBH Attorneys & Counselors for help. There’s never a good time to receive an IRS audit letter, so don’t stress about how much of your valuable time it will take to prepare your tax documents—call us instead.
We understand what the IRS is looking for when they audit your personal or business finances, and we can help you put together the information they need, and nothing more. We’ll coach you on how to communicate in a way that doesn’t invite additional questions about your finances, and how to choose a neutral meeting location for in-person document review.
Our team has offices in Grand Rapids and Kalamazoo, and we offer a free consultation to discuss the specifics of your situation. To get started, fill out our contact form today or call us at (616) 608-3061. We can review your case and give you our honest advice about how to proceed.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.